The stock market is a financial marketplace that pairs stock sellers with interested buyers. This is done through exchanges like the New York Stock Exchange and NASDAQ, which act as behind-the-scenes facilitators of most trades people make within their investment accounts.
When you hear people talk about “the market,” they’re usually referring to specific stocks or stock indexes. Learn how these markets work so you can make the best decisions about your own investments.
What is the stock market?
The stock market is a place where investors buy and sell shares of companies. Investors usually buy and sell through a broker, which could be an actual person or a firm that processes trades electronically.
The major purpose of the stock market is to raise money (often referred to as capital) for companies that they can use to grow and expand their businesses. The secondary purpose is to provide investors with the opportunity to share in the profits of publicly-traded companies. Investors profit in two ways: through dividends (a given amount of money per share at regular intervals) and through capital appreciation when the company’s price reflects an increase from their purchase price.
The overall performance of the stock market is tracked and reflected by a handful of stock indexes. These are what you hear referenced when news reports say the market is up or down. They work by measuring a weighted average of the collective price movements of select stocks, typically those from large and significant companies.
How does the stock market work?
The stock market brings together buyers and sellers of shares in publicly traded companies. It’s where companies raise money often referred to as capital by listing their shares for sale and investors purchase those shares in the hopes of receiving dividends or seeing their share price rise over time.
While the supply and demand of a company’s shares in the short term can influence its share price, over time, the market evaluates a business on its performance and future prospects. A growing business will likely see its share price rise, while a declining business may see its share price fall.
Stocks are bought and sold on exchanges such as the New York Stock Exchange or Nasdaq. Each stock market has its own set of rules that ensure transparency, consistency and fairness when trading stocks. To execute a trade, brokers match up potential buyers and sellers of the same stock. The trade price is determined by the best “bid” and the best “ask” – and the broker takes the difference as their fee.
How do I invest in the stock market?
Stock market investing is an important way to grow your wealth over the long term. To invest in the stock market, first decide on your financial goals and determine your investor profile. Then, pick stocks that align with your goals. A diversified portfolio is generally more attractive to investors, as it helps mitigate risks from financial volatility.
Next, learn about the different types of securities and understand how they work. Finally, find a broker that is right for you and open a DEMAT account. Once your account is ready, buy and sell stocks by placing a purchase or sale order. Ideally, you should only trade stocks once a day or less. Trading too frequently can be expensive, even if your brokerage offers zero trading fees. Buying individual stocks requires significant research and knowledge, but can yield higher returns than index funds or ETFs. This approach also requires a greater tolerance for volatility. However, it may be a good option for new investors who are uncomfortable with short-term fluctuations in the stock market.
What are the benefits of investing in the stock market?
Investing in the stock market, or equities, can help your money grow. Over time, stocks can earn you capital gains as their prices rise and dividends as companies’ profits increase. These gains can fend off inflation (which eats into the buying power of your paycheck) and help you reach financial goals you wouldn’t be able to achieve by saving in cash.
The stock market works as a kind of matchmaker: each trading day it pairs stock sellers with interested buyers. These sellers can be companies that are publicly listing their shares, or they can be individuals looking to resell the shares they bought earlier. Buyers offer a “bid,” or highest price they’re willing to pay, and sellers set an “ask,” or lowest selling price. The difference between these is called the bid-ask spread, and it’s a key part of how trades work.
The Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) create rules that protect investors and maintain fair markets. These regulations apply to both large market participants like banks and investment funds and everyday investors who buy and sell shares in the stock market through their brokerage accounts or robo-advisors.